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Photo: iStock
Photo: iStock

Loan defaults go up due to salary delays

  • Business downturn is another reason for loan defaults, says report
  • If you are unable to repay your existing loans, consider liquidating your fixed deposits, other investments

From the fear of job loss to the concern of getting delayed salaries or a lower salary hike, there’s quite a bit to worry about for an average salaried individual in the wake of the current slowdown. After all, there are utility bills and loan EMIs to service every month. In fact, in the last six months, salary delay was one of the leading reasons for default on loans, according to India Delinquency Report by CreditMate, a company that delivers recovery solutions for lenders.

According to the report, 36% people who participated in the survey said that delayed salaries is why they defaulted on loans. Business downturn at 29% is the next big reason. The company surveyed 200,000 cases that went into the recovery phase and the loan categories comprised two-wheeler, personal, small and medium-sized enterprises (SME), student, medical and digital loans.

“Job cuts and salary delays are things we are seeing very often now. This has a direct impact on one’s budget, especially if you are living pay cheque to pay cheque. At the maximum, one may have two to three months of expenses as savings," said Shweta Jain, chief executive officer and founder, Investography, a financial planning firm.

Increasing delinquency
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Increasing delinquency

There are other related factors too that can affect your loan repayment ability. According to Adhil Shetty, chief executive officer,, an online financial services marketplace, “Slowdown may necessitate a reduction in salaries. This can affect the borrower’s ability to repay the loan. Even if the salary isn’t reduced, there may not be increments and bonus payments may be deferred. This could put borrowers in trouble as they would have depended on these bonuses to tide over other life expenses or to pay the EMI itself. Any additional expense, such as an illness, can also seem as a major overhead in such a situation."

Why defaults are bad

While the slowdown is real and you may be trying your best to keep yourself afloat, understand that not repaying your loans on time can have a negative impact on your financial life in the long term.

A delay of over 90 days can lead to your lender categorizing your loan as a non-performing asset (NPA), after which your case will be marked for recovery. “Apart from the late payment penalties and increasing interest, you may also face legal action if the post-dated cheques you’ve given to the lender bounce. In case of secure loans such as home loans, the lender owns the property till the loan is paid. The property can be auctioned to recover the dues as mandated by the SARFAESI Act," said Shetty.

Also, not repaying your loan can affect your credit score. Loan defaults and write-offs reflect on your credit report for at least seven years, which could make it difficult for you to borrow in the long term.

What you can do

If you’re looking to take a loan in the current uncertain situation, there are some pre-emptive measures that you could take. Buy a loan protection policy which covers your liabilities such as home loans in case of an untoward situation. Shetty said such insurance policies help settle the liabilities in case the borrower dies and some of them also provide EMI protection for a fixed number of months if the borrower ends up losing her job due to conditions predefined in the policy.

Another way is to build an emergency corpus that can cover your EMI payments in case there’s a disturbance in your regular cash flows. But if you’ve realized that you would end up defaulting, keeping your lender informed is a good idea.

“It will help you build goodwill and let the lender know that you do intend to repay. If your lender understands your situation, you may get some buffer time to repay," said Jain.

If you find yourself stuck and are unable to repay your existing loans, your only option is to raise funds in the short term and find a way to keep paying the EMIs.

This includes taking stock of your investments, including physical assets. Exit the worst performing instruments. If you are still unable to cover the loan, as a last resort, you could consider liquidating assets such as jewellery.

“Short-term measures could help you tide over until you get back to being able to pay your EMIs normally," said Shetty. If your financial problems persist, consider selling off the asset (home or vehicle) for which you took the loan initially, he added.

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